FHA proposes updates to reverse mortgage debenture interest rates

The Federal Housing Administration (FHA) this week published a new proposed policy for the Home Equity Conversion Mortgage (HECM) program, which would update the way debenture interest rates for HECM loans operate.

The draft Mortgagee Letter (ML) “proposes updates to HUD’s calculations for the payment of debenture interest for HECM claims and establishes a process for retroactively adjusting the calculation of debenture interest for claims filed on HECMs that became due and payable on or after September 19, 2017,” FHA said in an announcement of the proposal.

Debenture interest refers to the percentage of a return that an investor would receive for lending money through a debenture. These proposals build upon several changes FHA made to the HECM program on Jan. 19, 2017, which went into effect later that year.

In a final rule titled “Strengthening the Home Equity Conversion Mortgage Program,” FHA codified several significant changes to the HECM program that were previously issued by HUD under the Housing and Economic Recovery Act (HERA) of 2008 and the Reverse Mortgage Stabilization Act of 2013.

The final rule also made additional regulatory changes to the HECM reverse mortgage program, including amended origination and servicing policies.

“This final rule [provided] that, for HECMs endorsed after January 23, 2004, if an insurance claim was paid in cash, the debenture interest rate for purposes of calculating the claim shall be the monthly average yield on United States Treasury Securities adjusted to a constant maturity of 10 years, for the month in which the default on the mortgage occurred,” FHA explained.

But the U.S. Department of Housing and Urban Development (HUD) never fully implemented this.

“To reaffirm its commitment to the future success of the HECM program and the senior citizen population it is designed to serve, HUD has determined that changes to its debenture interest payment methodology are necessary to maintain long-term program stability,” the announcement added.

There are three key provisions to this recommendation: a regulatory modification that changes the calculation of the debenture interest rate “including using the date of default as the date for determining the debenture interest rate on loans that become due and payable” after the publication of the proposed ML; adding a debenture interest rate section to the HECM portion of the Single Family 4000.1 Handbook; and establishing a debenture interest rate adjustment process.

That process would allow HECM holders to “request an adjustment for mortgages that became due and payable on or after September 19, 2017, and filed a claim prior to the effective date of the final ML, if an insurance claim was paid in cash,” FHA explained.

The draft ML also said that certain changes made in January to the Home Equity Reverse Mortgage Information Technology (HERMIT) system regarding how debenture interest rates work has created a “financial hardship to mortgagees that hold a substantial number of loans that were already in default at that time,” FHA said.

That change made it so that the debenture interest rates for all HECM claims filed from January 2024 onward, and paid in cash, would be “paid at the rate in effect as of the month the mortgage became due and payable,” the draft ML said.

“FHA has since identified that system changes did not align with regulations that require the debenture interest to be calculated based on the monthly average yield, for the month in which the default on the mortgage occurred” on Treasurys adjusted to the 10-year Constant Maturity Treasury (CMT) rate.

These changes are designed to “reaffirm” FHA’s commitment to the HECM program, as well as its long-term stability, the ML explained.

Stakeholders are instructed to provide feedback about the proposal through July 29. It is available to view on the Single Family Drafting Table, as are the forms and instructions for submitting comments.